AT&T's Stephenson: Device subsidy model is 'fundamentally changing'

AT&T (NYSE:T) CEO Randall Stephenson said that the model that has prevailed in the U.S. wireless industry for years of customers getting subsidized devices in exchange for signing two-year contracts is radically shifting.

Speaking at the Morgan Stanley Technology, Media & Telecom Conference, Stephenson said that competition ramped dramatically last year. It was sparked mainly by T-Mobile US (NYSE:TMUS), which shifted away from contracts and device subsidies and has since kept up the pressure, offering to pay the early termination fees of customers who switch to T-Mobile and trade in their devices. Other carriers have embraced device financing models in the wake of T-Mobile's actions.

Stephenson said the average customer now "has a lot more transparency" and can more clearly understand the value proposition of what carriers are offering. They can see the cost of devices more clearly and then force carriers to compete more directly on network quality and pricing. Customers are opting to choose lower monthly pricing in exchange for paying for the device up front or in installments, Stephenson said. "The customers are overwhelmingly choosing that equation," he said.

"We actually think the industry is at a place where you can see line of sight to the subsidy equation just fundamentally changing," he said.

The irony, of course, is that carriers used subsidies for years to get smartphone customers onto their networks, even though they paid hundreds of dollars per phone in subsidy costs. Now that operators have all of those smartphone customers, they are looking to reduce subsidy costs and improve their bottom lines.

AT&T said that its "Next" handset upgrade program attracted 10 percent of device sales at the end of the third quarter. For all of the fourth quarter it was 15 percent, but in December it was 20 percent. "We're seeing that number continue to move up," Stephenson said of current trends.

In December AT&T tweaked the pricing of its Mobile Share shared data plans for contract customers, and also introduced new "Mobile Share Value" shared data plans that are less expensive and are targeted at no-contract customers. Customers can get the plans by purchasing a new smartphone for no down payment with Next with monthly installment payments; bringing their own smartphone; buying a smartphone at the full retail price; or switching to the new plan when they are no longer under contract.

Stephenson also touched on AT&T's deal to acquire regional prepaid carrier Leap Wireless (NASDAQ:LEAP), and said he expects the deal will close by the end of the first quarter. Reiterating previous comments, he said that Leap's Cricket brand is a "very, very strong brand down market" and performs well in the prepaid segment. However, he said that people choose not to go to Cricket because of a lack of coverage. Stephenson said that combining the Cricket brand with AT&T's network will strengthen the brand and that AT&T hopes to shake up the prepaid market.

"We're going to be fairly aggressive here," he said, and "see if we can be a little disruptive down at that end of the market."

Interestingly, when asked if AT&T could take the Cricket brand into the postpaid market, Stephenson left open the possibility of doing so. He said an AT&T-owned Cricket will start out as a no-contract service.

"Over time, it will be interesting to see," he said. "Going from prepaid to postpaid is just a credit risk exercise." He said AT&T will evaluate its options but at the start "it's going to be heavily, heavily prepaid."

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